Trump's Tax Cut Was Very Good to the $200,000 to $1 Million Set
(Bloomberg Opinion) -- Who got the biggest tax cuts from the 2017 Tax Cuts and Jobs Act? Individual income tax return statistics for 2018 that were released late last year by the Internal Revenue Service allow us to see the impacts by income group, and they’re pretty interesting.
Those at the very top of the income distribution got tax cuts that were, as a percentage of income, not all that different from the middle to lower rungs. (Yes, there were some weird things going on below $10,000, but they can be chalked up to the vagaries of who files sub-$10,000-income tax returns, such as dependents with investment income.) The really big tax cuts were for those a little below the top, at adjusted gross incomes of $200,000 to $1 million a year.
A different IRS data set that divides taxpayers near the top of the income distribution by percentile and even thousandth of a percentile allows us to pinpoint the greatest beneficiaries even more precisely. It was those between the 98th and 99th percentiles, with adjusted gross incomes ranging from $359,368 to $540,009 (mid-point: $449,689), who got the biggest tax cut.
The main reason this group benefited so much is that the authors of the 2017 tax legislation took a chainsaw to the Alternative Minimum Tax. The AMT was born in 1969 as a fall-back tax system meant to snare a few hundred people near the top of the income distribution who had been paying little or no tax. But because it wasn’t indexed to inflation, by the mid-2000s it was affecting millions of taxpayers.
The 2017 tax law raised the income at which AMT exemptions begin to phase out for married couples filing jointly from $160,900 to $1 million, among other changes. As a result, the number of AMT filings dropped from 5 million in 2017 to 244,007 in 2018, and revenue from the tax fell from $36.4 billion to $4 billion. Four-fifths of that filing decline and three-quarters of the revenue decline were among taxpayers with adjusted gross incomes from $200,000 to $1 million.
My former Fortune magazine colleague Shawn Tully has written sympathetically of people in this general income category as “HENRYs” (for “high earners, not rich yet”) — “relentless strivers” who “played by the rules and did everything right” but were burdened by high taxes, mainly the AMT. Every once in a while somebody making $250,000 or $500,000 a year drives the Internet mad for a few weeks by asserting that they are “just getting by” or feel “average.”
Of course, the HENRYs most likely to feel like they’re just average live in expensive cities in states with high income and/or property taxes. For them, the AMT relief was at least partly canceled out by the 2017 law’s new $10,000 limit on state and local tax deductions, and its decrease in the amount of mortgage debt one can deduct interest on. It’s the HENRYs in less expensive, low-tax states that got the biggest tax breaks, and the pandemic-induced shift to remote work could mean there will be more of them in the years to come.
A related effect of the 2017 tax law is that it made the federal income tax a little less regressive at the high end. In general the income tax is progressive: the higher your income, the higher your tax rate. But way up in the income distribution — in the top one-10th of 1% — rates start to fall. Thanks to the AMT overhaul and other changes, the decline was a teensy bit less steep in 2018 than in 2017.
The reason those in the 0.01% and 0.001% pay lower taxes is straightforward. People who report tens of millions of dollars in income tend to report a lot of it as capital gains, which are taxed at a lower rate than ordinary income.
Capital gains have been taxed at lower rates than ordinary income since 1921, so this isn’t new. The justifications for the disparity range from the indisputable (because they’re not indexed to inflation, only part of the capital gains that people report on tax forms is really income) to the controversial (favoring capital gains in the tax code brings faster economic growth). The result is an income tax system in which at least since 2001, which is how far back IRS statistics on differences within the 1% go, those in the 0.001% (aka the 99.999th percentile and up) have faced a lower tax rate than the rest of the 1%, and in some years (albeit not since 2012) even lower than those between 1% and 2%.
This hasn’t gone entirely unnoticed over the years. “Economic resentment at the bottom of the top 1 percent of America’s income distribution is the new wild card in public life,” political pundit (since turned investment company executive) Matt Miller wrote in 2006. It certainly hasn’t turned out to be the main wild card. But hey, the Republican-controlled Congress passed and President Donald Trump signed a tax bill in 2017 that seems to have left the bottom of the top 1 percent better off relative to the top of the top, and those just below that a lot better off. Somebody cared about the HENRYs!
There were 8 million income tax returns filed in 2019 with 2018 adjusted gross incomes between $200,000 and $1 million, and 539,207 with incomes higher than that. That leaves 145 million tax returns that weren’t affected by this reshuffling at the top. To put matters in a broader context, here are changes in tax rates since 1980 for the entire income distribution. (I’m sorry that incomes are divided in yet another new way here, but I’ve got to work with what I’ve got.)
This shows a federal income tax that is progressive, albeit less so now than before the tax cuts of 1981 and tax reform of 1986. Include other federal taxes and state and local taxes, and the overall tax system starts to look a lot less progressive. Add in health-insurance premiums, as University of California at Berkeley economists Emmanuel Saez and Gabriel Zucman think we should since they’re more or less mandatory, and effective rates are flat from about the 60th through the 80th income percentiles and start dropping after that. The big equity issues in U.S. taxation are probably not the ones within the top 1% or 5%.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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